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ALESCORMS.COM
LONDON CARGO MARKET CONTINUES TO HARDEN, WHILST THE US STARTS TO FOLLOW SUIT. Towards the end of last year, we saw the global cargo market undergo a widespread hardening. Insurers realigned their focus to review each account and rate each risk as though they were presented as ‘new’ and not as a renewal. Previously, insurers charged nominal increases on renewal premiums (typically around 10%), but we are now witnessing a rate revision across the board. Factors such as loss history, stock & transit ‘base’ rates, interest and location are all playing a pivotal part in this rate increase, which is averaging around 25%.
At the turn of the year, the majority of rate rises within the cargo market were being applied to primary layers of placement, with excess layer rates remaining consistent throughout this period. Despite the early steadiness, it had become apparent that by the end of the first quarter we were beginning to experience large spikes in excess layer rates too. Acting as the catalyst for this shift were the notable exits from this division within the class, which include the likes of Royal Sun Alliance and Navigators. Altering underwriting risk appetites, minimum premium requirements and notable large losses, have also all contributed to excess layer rate rises.
CARGO STOCK THROUGHPUTSTATE OF THE MARKET UPDATEH2 - 2019
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THE CHALLENGES OF THE HARDENING LANDSCAPEWith hardening market conditions, senior management within insurance carriers continue to revisit their strategies in an attempt for greater returns on equity and a swifter return to profitability. Forming the core of this strategy is ensuring premiums are stringently aligned to the exposures – especially when capacity has significantly reduced.
Even with excellent risk management strategies, many of our insureds are feeling the pressure of rate rises, but this is an inevitable component to maintaining sustainability in the global cargo insurance market.
As just noted, the hardening landscape is dictating the underwriting guidelines and criteria with an actuarial price model being driven across the global cargo sector. Each risk quoted, be it new or renewal, must be fully modelled and internally rated prior to committing capacity. This has become industry norm; tolerance to deviation from these models is now non-existent, a key change from 18 months ago.
When looking at previous soft market cycles, top-line income was a primary focus for insurers, with senior management collectively encouraging underwriters to grow their books of business. Through a broader risk appetite and a willingness to negotiate on coverage and pricing, we observed market competition increase across the sector, but crucially at the expense of bottom line profits.
SOME RESOLUTION IN THE STORMY MARKET Major losses in 2018 such as the Californian wildfires and Typhoon Jebi continue to hamper the cargo market with loss reserves from these events increasing throughout 2019 and beyond. Although we do not envisage prior year loss reserves diminishing, it should be highlighted that the market continues to provide clients with some tangible solutions and benefits. The true test of an insurance policy is the settlement of a claim and paying out on recoverable claims quickly and efficiently remains a true value added factor for clients, especially when there is a higher price for risk transfer than 18 months ago.
PRACTICAL ADVICE FOR HANDLING RENEWALS IN THE HARDENING MARKETAs the cargo market remains in a state of flux and underwriters across the division align their strategies to the hardening market, brokers must put themselves in the driving seat when negotiating the best deal from insurers. Subsequently, we have collected the key insights of our cargo experts to bring you practical advice on how to navigate the current landscape:
1) TIME IS OF THE ESSENCE, PREPARATION IS VITAL
In a hard market cycle, stringent risk modelling forms the bedrock of insurer strategy, giving them a clear picture of what markets they want to participate in and how much capacity they want to attribute. Resultantly, clients must be advised to start the renewal process as early as possible, preparing well in advance to ensure deadlines are fully met. This will allow more time for underwriters to query and discuss the renewal information and data.
In current market conditions, this pressure has diminished with a strict onus to maintain bottom-line profit and contract capacity across the board. Since the end of 2017, capacity reduction has been prevalent in the London Cargo market. Retrospectively, it was possible to buy up to USD1,000,000,000 of vertical limit. That limit is now significantly lowered and varies depending on the type of risk and location - for example, when it comes to pharmaceutical risk, we estimate that capacity goes up to USD500,000,000 but then drops by half if the same risk moves to Central or South America.
As market conditions changed through 2019, underwriters have executed their policies to mitigate a hardening market with varying degrees of success. In spite of some successes, significant losses impacting the global cargo market continue to occur, with both insurers and the Lloyd’s Performance Board collectively calling a return to market-wide profitability. The table below highlights the severity of losses that occurred in 2019:
EVENT POSSIBLE LOSS TO MARINE
CARGO MARKET
US Whisky Warehouse Fires USD85,000,000
Four total loss (or CTL) on vehicle
carriers
USD400,000,000 –
USD500,000,000
Three Container vessels fire losses USD150,000,000
Explosion at Deer Park Oil Terminal USD30,000,000
Hurricane Dorian USD75,000,000 – USD
150,000,000
Ukraine Misappropriation Losses USD100,000,000
(although largely
unknown)
UK Warehouse Fire USD10,000,000
US Wine Flood USD40,000,000
*Correct as at October 2019
2) PREPARE FOR PREMIUM/ RATE RISES
Communication must be open and straightforward. Local brokers need to help insureds (and equally risk managers / CFOs) to understand the renewal process and any reason for rate rises from insurers, so they can qualify increases within their own organisation. We further appreciate that quotes are subject to 100% support and pricing can often change depending on the available capacity. By having a clear, open and direct dialogue with your client, you can mitigate and help prevent detriment caused from unpleasant surprises.
3) STRUCTURING COVER CORRECTLY IS KEY FOR THE CLIENT
It is vital property and cargo brokers work closely and creatively together to obtain optimal result for clients, utilising capacity in both markets where necessary.
A pivotal part to securing optimal levels of coverage is through presenting comprehensive information and insured’s risk management to underwriters.
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THE KEY INFORMATION WE NEED:
STOCK
• Maximum values per location – This is important as the largest location will typically set the policy limit
• Average values per location – Whilst the maximum value per location will determine the policy limit, cargo underwriters use the average values to rate the policy.
• COPE Information, including addresses and zip codes – stands for Construction, Occupancy, Protection and Exposure, allows the insurer to evaluate the risks in the current market
• Survey reports for large locations.
TRANSITS
• Estimated annual shipments split by:
• Incoming vs outgoing shipments
• International vs domestic
• Primary vs contingent risk
• Maximum shipment values
• Average shipment values.
LOSS RECORD
• Detailed loss record and procedures implemented in order to mitigate future losses.
FOR MORE INFORMATION, GET IN TOUCH:
CONDITIONS AND LIMITATIONSThis information is not intended to constitute any form of opinion or specific guidance and recipients should not infer any opinion or specific guidance from its content. Recipients should not rely exclusively on the information contained in the bulletin and should make decisions based on a full consideration of all available information. We make no warranties, express or implied, as to the accuracy, reliability or correctness of the information provided. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide and exclude liability for the statistical content to fullest extent permitted by law.
LONDON
PETER WILMOT | HEAD OF CARGO
T: +44 (0)207 204 1829 | M:+44 (0)782 505 9647
NORTH AMERICA
MELANIE BUITENDAG | ASSOCIATE DIRECTOR
T: +44 (0)203 425 3195 | M:+44 (0)755 728 9696
ABOUT ALESCOAlesco is a fast-growing and dynamic insurance broker that specialises in property, liability, accident & health, contingency and related lines of business across a diverse range of industries from energy and construction to marine, aviation and fine art, just to name a few. Combining the strength and reach of a global brand, with the service levels and flexibility of a specialist independent broker, Alesco is committed to building confidence and creating certainty in your business.
Clients across the globe rely on Alesco to identify, manage and mitigate risk – and to provide them access to the international insurance and reinsurance markets. Should clients require support in an individual specialism or the development of a single, comprehensive proposition across their portfolio, we have the proven skills and connections to serve all national and international interests.
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